Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Earnings hit new all-time high as inflation lifts all boats
Peter Garnry
Chief Investment Strategist
Summary: Q2 earnings are up 19% from Q1 in the MSCI World Index driven by strong earnings growth in the energy sector which is seeing its earnings jump 279% from a year ago. Revenue growth has accelerated and companies have improved margins substantially through cost reductions. It is truly inflation lifts all boats in the nominal world. We also take a look at next week's earnings releases which are getting fewer but there are still some important releases on tap.
Inflation is good for earnings in nominal terms
In a previous equity note on inflation in a historical perspective we highlighted that US earnings grew faster than the long-term trend growth during the 1970s as inflation lifts prices across the board and therefore also growth (nominal) figures. The 1970s was also a decade of very high interest rates compressing equity valuations to such as degree that the negative impact was larger than the positive dynamics from higher earnings growth. Whether those dynamics will play out again is difficult to speculate about.
What we can say is that inflation is once again lifting all boats with Q2 earnings in the MSCI World Index hitting a new all-time high up 7% y/y and 19% q/q driven by an acceleration in revenue growth (see chart below) and a significant rebound in operating margin as companies are exercising better cost controls. Operating margins are a mean reverting process and the current rebound in margins is at odds and potentially just a short-term temporary dynamic before they trend lower gain towards the average. A further slowdown in the economy would likely set in motion a renewed pressure on margins.
The big winner in Q2 is not surprisingly energy companies which have seen their earnings jump 279% y/y to the highest level on record. The global economy has slowed down considerably in the first six months of the year and oil prices have come down to reflect the increased probability of a recession which would impact demand. Natural gas prices are still elevated and the trading business of oil & gas majors is expected to continue being extremely profitable. It may be that energy companies have peaked in the short-term but in terms of equity valuations investors are still not paying a big premium on future cash flows from energy as ESG constraints and the green transformation are holding back institutional flows into energy stocks.
The list below highlights the most important earnings releases to track next week with earnings releases in bold being the ones that can either move market sentiment or lift an entire industry.
- Monday: Barrick Gold, Siemens Energy, Nippon Telegraph & Telephone, SoftBank Group, Tokyo Electron, Dominion Energy, BioNTech, AIG, Tyson Foods, Palantir Technologies, Take-Two Interactive
- Tuesday: Alcon, Globalfoundries, Roblox, Trade Desk, Coinbase Global, Akamai Technologies, Plug Power, Unity
- Wednesday: Commonwealth Bank of Australia, Vestas Wind Systems, Genmab, E.ON, Honda Motor, Prudential, Aviva, Walt Disney, Coupang, Illumina
- Thursday: KBC Group, Brookfield Asset Management, Orsted, Novozymes, Siemens, Hapag-Lloyd, RWE, China Mobile, Antofagasta, Zurich Insurance Group, NIO, Rivian Automotive
- Friday: Flutter Entertainment, Baidu
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